All 34 participating US banks have passed the Federal Reserve´s (Fed) annual stress tests, potentially boosting the amount of cash they have available for shareholder payouts.
On Thursday, the Fed marked its seventh round of stress tests since 2009 and the fifth round required by the 2010 Dodd-Frank Act, giving the nation´s largest banks a clean bill of health. Among the banks tested were big names such as JPMorgan Chase and Bank of America.
The Fed claimed the results showed an improvement compared with last year, with the level of high-quality capital held by US banks being significantly above regulatory requirements.
"This year's results show that, even during a severe recession, our large banks would remain well capitalised. This would allow them to lend throughout the economic cycle, and support households and businesses when times are tough," said Fed Governor Jerome Powell.
Since 2009, the banks have increased the amount of high-quality capital they hold by more than $750bn. It means the banks could be able to return more cash to shareholders going forward as they should not need to raise the amount of high-quality capital further.
The Fed used a "severely adverse" scenario, featuring a deep, global recession where the US unemployment rate was assumed to rise by over 5% to 10%. It modelled big losses in corporate loan markets and commercial real estate.
This especially negative event projects $383bn in loan losses at the 34 bank holding companies over nine quarters.
According to the Fed, the firms' aggregate common equity tier 1 capital ratio, which compares high-quality capital to risk-weighted assets, would fall from an actual 12.5% in the fourth quarter of 2016 to a minimum level of 9.2%.
In addition, the Fed also released results from its "adverse" scenario, which features a moderate US recession. Under this less extreme scenario, the aggregate common equity capital ratio of the 34 firms fell from an actual 12.5% in the fourth quarter of 2016 to a minimum level of 10.7%.
The Fed is to release a second round of stress-test results on Wednesday that will show whether it can approve banks´ capital plans. Banks are able to resubmit their plans if they discover that their own estimates differ greatly from the Fed´s analysis.
According to UBS analysts, the four largest US banks by assets — JPMorgan, Bank of America, Citigroup and Wells Fargo — should be able to return $59.8bn to shareholders this year. It forecasts the big four could then go on to increase shareholder payouts by over 20% in 2018.